Friday, August 7, 2009

The Michigan Legislature’s Balancing Act – or Not

"Job No. 1 is balancing the state budget," said Michigan Chamber of Commerce CEO Rich Studley. "Job No. 2 is balancing the state budget and Job No. 3 is balancing the state budget. We think it's important to get the right steps in the right order."

Studley was talking about efforts to pass the State of Michigan’s fiscal year 2010 budget starting October 1, with recent estimates putting the projected deficit as high as $2.7 billion. The longer run issue is to create a tax climate in Michigan that's fair and attractive to businesses while finally returning state government to stable financial footing – and ending the structural tax and spending problem that has bedeviled legislators for years.

House Republicans, in the minority (Democrats hold a 67-43 edge over Republicans in the 110-member House), unveiled a proposal last Wednesday to significantly cut state spending for the budget year, freeing up more federal stimulus money for road construction and job creation programs.

The proposal would freeze state hiring and employee pay, trim spending in several departments, privatize some prison services and make dozens of other changes to either cut or save nearly $1.4 billion. That would allow the state to take about $700 million from the federal Recovery Act, now expected to help fill general budget deficits, and spend it in other places. House Republican Leader Kevin Elsenheimer of Kewadin said the plan would balance Michigan's budget without tax or fee increases.

Meanwhile, Republicans who control the state Senate have voted for spending cuts of more than $1 billion, including the elimination of the $140 million scholarship program and a $110 per student funding reduction for Michigan's K-12 schools. But many of the Democrats who run the state House don't want to cut nearly that much.

Governor Granholm Democratic governor has proposed cuts to tax revenue sharing payments that help local governments pay for police, fire departments and other services. But she won't support even deeper cuts passed by the Republican-led Senate. She also has supported scaling back some tax incentives or closing what she calls "loopholes" for "special interests" as revenue enhancers. She has not, however, released her list of just which of the estimated $36 billion “tax expenditures”, also known as “silent spending”, she would eliminate or scale back.

Also, much of the upcoming budget hole could be filled with money from the federal stimulus package. But cuts still would have to be made in the next fiscal year, so avoiding the pain this year will again involve “kicking the can down the road” another year.

What is clear is that no one wants to touch tax increases or to address the long term structural budget deficit the state faces. Unless addressed this year, this will likely need to wait until 2011 with a new Governor and a new legislature, as few legislators will have the stomach for the fight in the 2010 election year. A good primer on the subject, however, can be found at SPECIAL REPORT: Michigan's tax reform playbook by The Center for Michigan, August 6, 2009.


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